Dispatches from the 10th Crusade

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Interesting times

One thing that cannot reasonably be said of our times is that they are uninteresting. All at once the world is turned on its head, and none can say what will shake out.

The dissolution of the euro, or the expulsion of Greece from the EU, remain pressing possibilities. And the folly of the Monetary Union lies exposed for all to see in the afflictions of Italy. Evans Pritchard: “Let me add that Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency. The euro structure itself has turned a solvent state into an insolvent state.”

There is also the fascinating tale of the collapse of MF Global, the broker-dealer trading house run into the ground by Jon Corzine, formerly senator and governor of of the State of New Jersey. I do declare that the tongue-lashing delivered by the New York press, the stern and self-righteous lecture they have read Mr. Corzine for his miscalculations, tempts even the humblest man with schadenfreude. Roger Lowenstein explains the whole squalid mess ably here. Later reporting has revealed some of the lineaments of the particular trades on European sovereign debt that ruined firm. Again I feel that we are forced to penetrate these alchemies out of necessity; they comprise the methods by which our political economy is financed.

Then there is the broader revolt against what we might call the political of acquisition: the Right to Left revulsion from this particular feature of our political life in common. I will have more to say on that at a later time. Suffice it to say that I cannot in good conscience align myself with any of the standard narratives proffered to explain, critique or castigate the emancipation of acquisition.

Comments (7)

Woe to the country that pursues a dearer currency!

Woe to the country who leaves the euro behind and attempts to sail the very stormy waters of international trade during the transition to a post-dollar world using its own puny currency. The euro currency (a commercial endeavor not identical to the political project of the European Union) was the brainstorm of conservative forces within Europe seeking a way out from under the hegemony of the dollar reserve standard without war. The euro was created to help restore sovereignty to Europe viz a viz the U.S. following WWII. European central bankers have known since the 70's that the dollar was going to collapse, giving them the opening they were looking for, and it took twenty years from then to bring the euro online. Why is the dollar doomed? Because it is now a purely fiat money and all purely fiat moneys fail. Sovereign paper moneys, while working remarkably well as mediums of exchange and units of account, fail utterly and repeatedly as stores of value. (Is there anyone, official or private, who still hold some of their wealth in Assignats, Continentals?? Ok, what about gold bullion?)

But the euro was designed for a new paradigm, one where Triffin's dilemma has been neutralized. The euro, a fiat currency, is not meant to be a store of value, only a medium of exchange and unit of account. The euro was designed for a time where the primary currency reserve asset is not another fiat money, but rather gold bullion. How do I know this? Because the ECB tells us every quarter when it releases its consolidated financial statement with revaluations of its reserve assets--denominated in euros not dollars. At the introduction of the euro ten years ago gold bullion made up 30% of its reserve assets, today gold makes up over 65%. The euro is not pegged to gold, the euro floats against gold and yields to bullion the function of preserving wealth through time. It is actually the dollar which is officially pegged to our gold assets at $42.22/oz.

That is not all. The ECB also has a different view on the proper role of a central bank. This just today from another blogger viewing today's press conference with new ECB president, Mario Draghi:

Reporter: (Paraphrasing here) Do you believe the ECB needs to stand ready as the lender of last resort to fight the Euro zone crisis?

Draghi: Let me answer your question with a question. What makes you think that being the lender of last resort is the solution to the Euro Zone crisis?

and this:

Reporter: Given the problems in Italy do you believe that the ECB will be forced to buy Italian bonds for a long time?

Draghi: We're not forced to do anything. We are independent and makes our decisions accordingly.

The ECB was designed to have the single mandate of stable prices rather than the conflicting mandates of stable prices and full employment. The ECB is severed from the nation state, it is not on the hook for unlimited liabilities denominated in the currency it issues. That the ECB is not a lender of last resort is not a fatal weakness, it is one of its greatest strengths! And apparently the president of the ECB agrees. What is the solution to the Euro Zone crisis? It's not the ability to devalue a national currency. The ultimate solution lies in a new monetary order where the price of gold bullion accurately reflects its true value and it's no longer necessary for the world to absorb massive dollar inflation in order to keep international trade humming along.

You always post interesting comments, Andrew E. And I do tend to agree with your remark that it is "necessary for the world to absorb massive dollar inflation in order to keep international trade humming along." We're not feeling the inflation, but other nations certainly are.

Still, what institution will perform the lender of last resort function for Italy? That nation's finances are far from perfect, but under normal (that is, sovereign) circumstances, they would be manageable. Instead, Greek profligacy, through the mechanism of the Common Currency, may drive Italy to bankruptcy.

I think, like the Greeks, Italians are going to have to make a choice. They can leave the euro and devalue and take their chances in the wild world on their own or they can stay with the euro, the relative security it provides against the world outside Europe and the shielding it will give to the worst of dollar hyperinflation. If they stay, they will probably need to find some mix of haircuts, austerity and bailouts to restore order, same as Greece. If the ECB thought the very existence of the euro was at stake, they would probably step in to prop up debt markets but that would violate the spirit of the euro currency so I don't see that happening. The euro can survive without Italy. Strong nations like Germany will work with Italy to keep them in, Germany wants as large a trading zone as possible. The Germans are a productive and industrious people, they have lots of trade to do with the world and they'll do it even if certain partners aren't giving them full value in return.

Once the dollar passes from the scene and gold is re-valued much higher, these kinds of imbalances within the Eurozone will be settled by moving gold reserves around at the Bank of International Settlements. And these gold flows will send price signals that will regulate international trade. (The BIS by the way, the central bank to central banks, stands waiting and ready to make a market in physical gold for delivery when the time comes) I've learned all of this by reading FOFOA's blog, the comments and the Kitco archives on which FOFOA's knowledge was built.

Here is a bit from the forward to the archives at USA Gold where this alternative worldview I'm attempting to describe here got its genesis:

When the once highly secretive London Bullion Market Association (LBMA) -- its venerable membership comprising the world's largest gold dealers -- published its daily clearing volume for the first time in January 1997, it rocked the tight-knit world of international gold traders and analysts.

According to this first of many subsequent LBMA press releases, thirteen hundred tonnes of gold (representing more than 50% of the world's annual mine production) changed hands daily in this fog-shrouded center of the global gold market. This figure represented over $10 billion per day and $4 trillion per year in bullion banking activity!

The gold market had always stood in austere, quiet contrast to the highly charged, mega-volume world of stocks and bonds. Now this first LBMA report forced analysts, investors, and brokers to reassess their understandings of the gold market. While some revelled in the glow of the large LBMA numbers, others began to raise some very important and rather unsettling questions. First, Why was this much gold on the move? Second, Where was all this gold going? And third, Where was all this gold coming from?

Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text. If you are not similarly moved to at least reassess your own view of the international financial scene after reading what's revealed below, then you are either firmly entrenched in your world view, or you've been numbed by too many hours of Wall Street's cheerleader (CNBC) and too many Friday nights with Louis Ruykeyser.

What matters most to us here at USAGOLD is ANOTHER's educational value to all who would take the time to read and think through his (at times) arcane and cryptic commentary of international economic dealings behind-the-scenes. ANOTHER demonstrates a feel for and understanding of the gold and oil markets that indicates connections at the highest echelons of international finance, yet for reasons having to do with his "position," as he has indicated, he wishes to remain anonymous. If his "THOUGHTS!" are theory; they are good theory. If they are speculation; they are reasonable speculation. If they are supposition; they are well-grounded supposition.

In the final analysis, ANOTHER offers one of the more plausible hypotheses for why the financial markets have acted as they have in the past few years, and therein lies his immense value to the reader, no matter who he is. Again, knowledge as is conveyed in his series of "THOUGHTS!" is rarely to be found outside the highest levels of international finance, and is seldom to be seen bandied about on the front pages of The Wall Street Journal or your favorite financial newsletter.

As explained by ANOTHER, an opportunistic arrangement for massive physical gold acquisition among important petroleum producing and exporting nations could be comfortably facilitated within these astronomical trading volumes now being publicly revealed via the LBMA. For the oil states this meant receiving real money (as opposed to government-sponsored paper) in payment for their depleting oil reserves. For the industrialized countries, this meant a continuing supply of cheap oil to fuel the economic boom already in progress. These transactions were to be cleared through the bustling London gold market. Up until late 1996, the volumes were a tightly kept secret so "the deal" proceeded without the knowledge of the general public.

When the LBMA went public with its figures, it raised the shroud off "the deal." But by then, according to ANOTHER, it no longer mattered. The oil states had already (almost inadvertently) cornered the gold market. As implied by ANOTHER's own words, his motivation for these postings was the discovery by "big traders" in the Far East of this opportune facility to buy gold at ever lower prices. Their subsequent heavy purchases of physical gold upset the delicate balance. Now there was no longer a reason to keep it secret, and hence, the revelation of this extraordinary tale.

The Eurozone problem has no solution, loans or otherwise, simply because there's no good way to carry out a very bad idea, or to fix it once it heads south, as inevitably it must. Ideas have consequences, and bad ideas have bad ones. The euro was a bad idea.

The day is coming when everyone will wish they were Switzerland. Not that Switzerland won't feel the effects of the financial earthquake that will shake both Europe and the world. Of course it will feel it. But better to sustain the fiscal tornado in Switzerland than in almost any place I can name.

The Swiss apparently understand that when you hook your economic wagon the star of the international guild of financial charlatans, or when you sign over your fiscal sovereignty to the EU alchemists who think they can turn things into gold that are not gold, you will pay dearly for your foolishness. Get out your checkbooks; the time to pay is approaching.

But man-made economic disasters will keep happening because disasters are, at best only, a temporary halt on arrogance, ignorance, and tomfoolery.

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